President Obama Proposes Student Aid Increases in State of the Union Address

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Mark Kantrowitz

As a nationally recognized financial aid expert, Mark has been called to testify before Congress about student aid on several occasions.

He has served as a guest columnist for the New York Times and the Huffington Post and has been interviewed regularly by major news outlets, including the Wall Street Journal, USA Today, MSN, CNN, NBC, ABC, CBS, CNBC and more.

Mark is the author of five books, including three about student aid. His most recent book, Secrets to Winning a Scholarship, helps families find and win scholarships. He is also on the editorial board of the Council on Law in Higher Education and the editorial board of the Journal of Student Financial Aid, a member of the board of directors of the National Scholarship Providers Association and a member of the board of trustees of the Center for Excellence in Education.

Mark is ABD on a PhD in computer science from Carnegie Mellon University (CMU) and holds Bachelor of Science degrees in mathematics and philosophy from MIT and a Master of Science degree in computer science from CMU.

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In the state of the union address on Tuesday, January 24, 2012,
President Obama proposed several increases in student aid
spending. The first two proposals call for Congress to extend existing
student aid programs that are scheduled to expire this year.

Stop the pending increase in student loan interest rates. The
College Cost Reduction and Access Act of 2007 enacted a phased-in
interest rate reduction on subsidized Stafford loans to undergraduate
students. This legislation cut the fixed interest rate on these loans
from 6.8% in 2007-08 to 6.0% in 2008-09, 5.6% in 2009-10, 4.5% in
2010-11 and 3.4% in 2011-12. But unless Congress acts, new loans in
2012-13 will revert to a 6.8% interest rate, double the current 3.4%
interest rate.

Extend the American Opportunity Tax Credit’s improvements to the
Hope Scholarship Tax Credit. The American Opportunity Tax Credit,
one of President Obama’s original campaign promises, increased the
maximum Hope Scholarship tax credit from $1,800 to $2,500, made it
available for four years of postsecondary education instead of two,
added textbooks to the list of qualified higher education expenses,
increased the income phaseouts and made the tax credit partially
refundable. These improvements will expire at the end of 2012 unless
extended by Congress.

Double the number of Federal Work-Study jobs. Federal
Work-Study jobs help more than 700,000 students earn money to pay for
college. President Obama’s proposal would double the number of Federal
Work-Study jobs to 1.4 million.

In addition, President Obama called upon state legislatures to put a
higher priority on funding for higher education, colleges to control
tuition inflation and Congress to pass the Dream Act.

Public college tuition inflation goes through feast/famine
cycles. During a recession and for a few years afterward, state income
tax revenue decreases because of high unemployment rates. The states
must balance their budgets and one of the first budget items they cut
is support of postsecondary education. This, in turn, forces public
colleges to cut classes and increase tuition. They also increase
enrollment of out-of-state students who pay higher tuition. Cuts in
state appropriations to public colleges over the past four decades
have been the primary driver of public college tuition inflation. The
state legislatures have also cut state grant programs on a per-student
constant dollar basis. The cuts in state appropriations and state
grant programs this year are particularly severe. But it is also
ironic for the federal government to be calling on state legislatures
to increase their investment in postsecondary education, when Congress
has been cutting federal student aid programs.

President Obama’s proposals for increasing student aid funding are
targeted at middle-income families, not just low-income students. A
quarter of students receiving subsidized Stafford loans are from
middle-income families. A third of the recipients of education tax
benefits and Federal Work-Study jobs are from middle-income families.

The total cost of the three student aid proposals is at least $10
billion a year. Assuming a 10-year repayment term, extending the 3.4%
interest rate on subsidized Stafford loans to undergraduate students
will cost about $5.6 billion for each additional year ($4.5 billion on
a net present value basis, assuming a 5% discount rate). Assuming a
20-year repayment term, the cost is $12.6 billion for each additional
year of new 3.4% fixed rate loans ($8.2 billion on a net present value
basis). Doubling the number of Federal Work-Study jobs will cost $1.2
billion a year. Extending the American Opportunity Tax Credit will
cost several billion dollars a year.

These proposals are not well-targeted at students with the greatest
financial need. The 3.4% interest rate on subsidized Stafford loans,
for example, mostly helps students after they graduate. Individual
borrowers will save about $6 per month per year of subsidized Stafford
loans at the higher rate, on average. Cutting the interest rates on
student loans does not improve access to a postsecondary education,
retention rates or graduation rates.

This is in contrast with the student aid cuts enacted by the
Consolidated Appropriations Act of 2012. For example, this legislation
reduced the income threshold at which a low-income student receives a
full Pell Grant from $32,000 to $23,000. This cuts the Pell Grant for
13.5% of Pell Grant recipients by $1,100 to $1,600. Such a big cut in
federal grants makes it much more difficult for more than a million
low-income students to pay for college, hurting college enrollment and
completion rates. The savings from this cut in Pell Grant
funding is less than a quarter of the cost of extending the 3.4%
interest rate on subsidized Stafford loans. If Congress has $10
billion a year available to spend on student financial aid, some of
that money should be used to reverse the cut to the auto-zero EFC
income threshold.